CANADA FX DEBT-C$ gains vs weak U.S. dollar after strong Canadian data

* Canadian inflation, retail sales data boost loonie

* CAD gains helped by U.S. dollar weakness after Trump comments

* Canadian yields higher after strong data (Adds details, comment; updates prices)

NEW YORK, July 20 (Reuters) - The Canadian dollar posted steep gains against a broadly weak the U.S. dollar on Friday after strong inflation and retail sales data reinforced expectations for another interest rate hike by the Bank of Canada this year.

The loonie was on track to post its largest one-day gain versus the U.S. dollar in three weeks.

Canada’s annual inflation rose last month to its highest in more than six years, while retail sales in May posted their biggest increase in seven months.

The annual inflation rate rose to 2.5 percent in June, exceeding market expectations. Annual inflation has now exceeded the Bank of Canada’s 2.0 percent target for the fifth straight month.

Canadian retail sales in May rose 2.0 percent, the biggest increase in seven months, pushed up by sales at auto dealers and gasoline stations.

“In the absence of an external shock that impacts household spending patterns, today’s data puts the Bank of Canada on course toward an early-autumn rate hike,” said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

“As our misgivings about consumer sustainability continue to prove unfounded, the stage is set for near-term currency outperformance – particularly in the event that trade war fears begin to dissipate ahead of U.S. mid-term elections,” he added.

In late morning trading, the U.S. dollar fell 1.1 percent against the Canadian currency to C$1.3131.

The Canadian dollar also rose against the euro, which fell 0.5 percent to C$1.5368. It also gained against sterling, which slid 0.4 percent to C$1.7203.

The loonie’s rise has also been helped by the drop in the U.S. dollar after President Donald Trump on Thursday and Friday complained about a strong greenback and the rise in U.S. interest rates.

Against a basket of six major currencies, the U.S. dollar fell 0.6 percent to 94.578, way below the one-year high of 95.62 reached in the previous session.

Canadian government bond prices were lower across the curve and yields were higher in the wake of strong Canadian data and in line with the U.S. Treasuries market.

The two-year yield rose 1.974 percent, compared with 1.931 percent late on Thursday, while the 10-year was up at 2.179 percent from Thursday’s 2.109 percent.

The spread between the U.S. 10-year Treasury and Canadian 10-year yields narrowed for a third straight day on Thursday to just under 70 basis points on strong Canadian data. The yield gap, however, has expanded since the beginning of the year in favor of the U.S. dollar. (Reporting by Gertrude Chavez-Dreyfuss Editing by Chizu Nomiyama and Dan Grebler)